Government to review EPFO circular on salary, allowances

The circular did not actually change the rules and had not clarified which allowances needed to be included in the calculation of basic wage.

NEW DELHI: You can breathe easy with the government reviewing a circular issued by the Employee Provident Fund Organization (EPFO) that had asked employers to deduct the subscription from the gross salary, including allowances, a move that would have reduced the take-home salary of over 5 crore workers.

A senior labour ministry official said there was a "rethink" on the circular that was issued on November 30, although a final decision is yet to be taken.

The official added that the circular did not actually change the rules and had not clarified which allowances needed to be included in the calculation of basic wage. The circular was meant to ensure that employers did not shirk their responsibility, the official added.

Officials said the circular was largely meant to protect employees earning below Rs 6,500 per month (for whom EPF is mandatory). In such instances, there have been cases where employers have split up the basic wage into various allowances, so as to reduce its contribution to the EPF.

It is not mandatory for those earning above Rs 6,500 per month to opt for the EPF, but once employees opt for EPF, there is no opting out of it till the amount is withdrawn in full. Many employers expressed reservations after TOI first reported it on Tuesday as the circular would impact their wage bills. Typically, high salaried employees in the private sector do not opt for EPF.

Employees have to contribute 12% of their basic wage towards PF and the amount is matched by their employers. The issue of employers shrinking the size of the basic wage and inflating allowances to reduce their PF burden has long plagued the EPFO.

Both employers and trade unions objected after TOI first reported about it on Tuesday. "We have sent a letter to the labour ministry objecting to certain provisions in the circular," D L Sachdev, AITUC national secretary and trade union representative in the Central Board of Trustees of the EPFO, said. The consent of the CBT was not taken before issuing the circular, Sachdev added.

Besides, in a note, consulting firm PricewaterhouseCoopers pointed to conflicting judgments on the subject. "Recently, the Madhya Pradesh high court ruled that allowances that are given universally, necessarily and ordinarily to all employees form part of the basic salary. The judgment has been challenged in the Supreme Court and the matter is yet to be decided. The decision of the SC would perhaps provide a direction in the matter but till then, this circular is a wake-up call for the employers to review their position in relation to compensation structure," it said.